UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended February 29,
2008
OR
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from
to
Commission File Number: 0-18926
JOES JEANS INC.
(Exact name of registrant as specified in its charter)
Delaware
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11-2928178
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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5901 South Eastern Avenue, Commerce, California
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90040
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(Address of principal executive offices)
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(Zip Code)
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(323) 837-3700
(Registrants telephone
number, including area code)
NO CHANGE
(Former name, former
address and former fiscal year, if changed since last report)
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x
Yes
o
No
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See
definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act) (check one):
Large
accelerated filer
o
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Accelerated
filer
o
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Non-accelerated
filer
x
(Do not check if a smaller reporting company)
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Smaller
reporting company
o
|
Indicate by check mark whether the registrant is a
shell company (as defined by Rule 12b-2 of the Exchange Act). Yes
o
No
x
The number of shares of the registrants common stock
outstanding as of April 14, 2008 was 59,750,204.
INNOVO GROUP INC.
QUARTERLY REPORT ON FORM 10-Q
PART I FINANCIAL
INFORMATION
Item 1. Financial
Statements.
JOES JEANS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE
SHEETS
(in thousands)
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|
February 29, 2008
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November 30, 2007
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(unaudited)
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ASSETS
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Current assets
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Cash and cash equivalents
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$
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1,877
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$
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1,331
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Accounts receivable, net of allowance for customer credits and returns
of $708 (2008) and $652 (2007)
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580
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803
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Inventories, net
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19,562
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20,803
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Prepaid expenses and other current assets
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283
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282
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Total current assets
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22,302
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23,219
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Property and equipment,
net
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714
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792
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Goodwill
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10,731
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10,415
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Intangible assets, net
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13,200
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13,200
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Other assets
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30
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Total assets
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$
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46,977
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$
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47,626
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities
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Accounts payable and accrued expenses
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$
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6,698
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$
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7,794
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Due to factor
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3,339
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3,040
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Due to related parties
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234
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1,142
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Total current liabilities
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10,271
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11,976
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Deferred tax liability
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5,254
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5,254
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Commitments and
contingencies
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Stockholders equity
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Preferred stock, $0.10 par value: 5,000 shares authorized, no shares
issued or outstanding
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Common stock, $0.10 par value: 100,000 shares authorized, 59,862
shares issued and 59,750 outstanding.
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5,988
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5,988
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Additional paid-in capital
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102,269
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102,056
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Accumulated deficit
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(74,029
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)
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(74,872
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)
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Treasury stock, 112 shares
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(2,776
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)
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(2,776
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)
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Total stockholders equity
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31,452
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30,396
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Total liabilities and stockholders equity
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$
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46,977
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$
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47,626
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The accompanying notes are an integral part of these financial
statements.
1
JOES
JEANS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
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Three months ended
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February 29, 2008
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February 24, 2007
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(unaudited)
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Net sales
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$
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15,210
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$
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13,814
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Cost of goods sold
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8,422
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8,719
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Gross profit
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6,788
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5,095
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Operating expenses
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Selling, general and administrative
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5,604
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4,982
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Depreciation and amortization
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87
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88
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5,691
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5,070
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Operating income
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1,097
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25
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|
Interest expense
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(192
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)
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(193
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)
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Other expense
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3
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|
Income (loss) before
provision for taxes
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905
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(165
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)
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Income taxes
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62
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8
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Net income (loss)
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$
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843
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$
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(173
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)
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Earnings (loss) per common
share - basic
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$
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0.01
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$
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(0.00
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)
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Earnings (loss) per common
share - diluted
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$
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0.01
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$
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(0.00
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)
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Weighted average shares
outstanding
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Basic
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59,261
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39,450
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Diluted
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59,558
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39,450
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The accompanying
notes are an integral part of these financial statements
2
JOES
JEANS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
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Three months ended
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February 29, 2008
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February 24, 2007
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(unaudited)
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CASH FLOWS FROM OPERATING
ACTIVITIES
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Net cash provided (used in) by operating activities
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$
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572
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$
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(3,442
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)
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CASH FLOWS FROM INVESTING
ACTIVITIES
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Proceeds from sales of property and equipment
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2
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Payments for earnout on trademark
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(316
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)
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Purchases of property and equipment
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(9
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)
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(4
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)
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Net cash used in investing activities
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(325
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)
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(2
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)
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CASH FLOWS FROM FINANCING
ACTIVITIES
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Proceeds from factor borrowing, net
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299
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764
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Proceeds from issuance of common stock
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3,623
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Net cash provided by financing activities
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299
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4,387
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NET CHANGE IN CASH AND CASH
EQUIVALENTS
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546
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943
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CASH AND CASH EQUIVALENTS, at beginning of period
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1,331
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|
385
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|
|
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CASH AND CASH EQUIVALENTS, at end of period
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$
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1,877
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$
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1,328
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The accompanying
notes are an integral part of these financial statements.
3
JOES
JEANS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in
thousands)
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Total
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Common Stock
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Additional
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Accumulated
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Treasury
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Stockholders
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Shares
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Par Value
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Paid-In Capital
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Deficit
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Stock
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Equity
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Balance, November 25, 2006
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34,455
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$
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3,447
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$
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79,763
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$
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(77,126
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)
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$
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(2,776
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)
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$
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3,308
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Net loss (unaudited)
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|
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(173
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)
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(173
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)
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Stock-based compensation
(unaudited)
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5
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5
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Issuance of common stock
and warrants (unaudited)
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6,835
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684
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2,910
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3,594
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|
|
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|
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|
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Balance, February 24,
2007 (unaudited)
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41,290
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$
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4,131
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$
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82,678
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$
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(77,299
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)
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$
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(2,776
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)
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$
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6,734
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Balance, November 30, 2007
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59,862
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$
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5,988
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$
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102,056
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$
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(74,872
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)
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$
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(2,776
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)
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$
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30,396
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Net income (unaudited)
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|
|
|
|
|
|
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843
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843
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Stock-based compensation
(unaudited)
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213
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213
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|
|
|
|
|
|
|
|
|
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Balance, February 29, 2008
(unaudited)
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59,862
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$
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5,988
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$
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102,269
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$
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(74,029
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)
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$
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(2,776
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)
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$
|
31,452
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|
The accompanying notes are an integral part of these financial
statements.
4
JOES JEANS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The
unaudited condensed consolidated financial statements of Joes Jeans Inc., or
Joes, which include the accounts of its wholly-owned subsidiaries, for the
three months ended February 29, 2008 and February 24, 2007 and the
related footnote information have been prepared on a basis consistent with Joes
audited consolidated financial statements as of November 30, 2007
contained in Joes Annual Report on Form 10-K and Amendment No. 1 to
its Annual Report on Form 10-K/A for the year ended November 30,
2007, or collectively, the Annual Report.
Joes
principal business activity involves the design, development and worldwide
marketing of apparel products. Joes
primary current operating subsidiary is Joes Jeans Subsidiary Inc., or Joes
Jeans Subsidiary. All significant
inter-company transactions have been eliminated. Currently, Joes has only one segment of
operations, primarily apparel, which includes an immaterial amount of revenue
from a license agreement for accessories.
Prior to fiscal 2004, Joes operated in two segments - apparel and
accessories. On October 12, 2007,
Joes filed an amended and restated certificate of incorporation in Delaware to
change its corporate name from Innovo Group Inc. to Joes Jeans Inc. and to
increase the shares of common stock authorized for issuance to 100,000,000.
Joes
fiscal year end is November 30.
Effective October 11, 2007, Joes changed from a thirteen-week
quarterly reporting period to a last day of the month quarterly reporting
period. This change was made to conform
to standard quarterly accounting periods.
Prior to a change in its fiscal year in October 2007, Joes fiscal
year end was the Saturday closest to November 30 based upon a 52 week
period and the quarterly periods consisted of 13 week periods based on a Sunday
to Saturday week. Quarterly periods
presented have three calendar months for the period ended February 29,
2008 and 13 weeks for the period ended February 24, 2007. The modification of the fiscal years and
respective quarterly periods did not have a material effect on Joes financial
condition, results of operations or cash flows.
These
unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements. These unaudited condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and the related notes thereto contained in
Joes Annual Report. In the opinion of
management, the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring adjustments), which management
considers necessary to present fairly Joes financial position, results of
operations and cash flows for the interim periods presented. The results for the three months ended February 29,
2008 are not necessarily indicative of the results anticipated for the entire
year ending November 30, 2008. The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements. Actual results may differ from those
estimates.
NOTE 2 ADOPTION OF ACCOUNTING PRINCIPLES
On
July 13, 2006, the Financial Accounting Standards Board, or FASB, issued
Interpretation No. 48, or FIN No. 48, Accounting for Uncertainty in
Income Taxes: An Interpretation of FASB Statement No. 109. This interpretation clarifies the accounting
for and disclosure of uncertainty in income taxes recognized in an entitys
financial statements in accordance with SFAS No. 109, Accounting for
Income
5
Taxes. This interpretation defines the criteria that
must be met for the benefits of a tax position to be recognized in the
financial statements and the measurement of tax benefits recognized. The provisions of FIN 48 were effective for
fiscal years beginning after December 15, 2006. Joes adopted FIN 48 effective December 1,
2007. The adoption of FIN 48 did not
have a material impact on its results of operations, consolidated financial
position or cash flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, or SFAS No. 157, which defines fair value, establishes a
framework for measuring fair value and requires enhanced disclosures about fair
value measurements. SFAS No. 157 requires companies to disclose the fair
value of their financial instruments according to a fair value hierarchy (i.e.,
levels 1, 2, and 3, as defined).
Additionally, companies are required to provide enhanced disclosure
regarding instruments in the level 3 category, including a reconciliation of
the beginning and ending balances separately for each major category of assets
and liabilities. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. Joes
adopted SFAS No. 157 on December 1, 2007. Given the nature of Joes current financial
instruments, the adoption of SFAS No. 157 did not have a material impact
on its results of operations or consolidated financial position.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115, or SFAS No. 159.
SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. Unrealized gains and losses
on items for which the fair value option has been elected will be recognized in
earnings at each subsequent reporting date.
SFAS No. 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. Joes adopted SFAS No. 159 on December 1,
2007. Given the nature of Joes current
financial instruments, the adoption of SFAS No. 159 did not have a
material impact on its results of operations or consolidated financial position.
NOTE 3 ACCOUNTS RECEIVABLE, INVENTORY ADVANCES AND DUE (TO) FACTOR
During
the three months ended February 29, 2008 and February 24, 2007, Joes
primary method to obtain the cash necessary for operating needs was through the
sale of accounts receivable pursuant to factoring agreements and obtaining
advances under inventory security agreements with its factor, CIT Commercial
Services, Inc., a unit of CIT Group Inc., or CIT.
As
a result of these agreements, amounts due to factor consist of the following
(in thousands):
|
|
February 29, 2008
|
|
November 30, 2007
|
|
Non-recourse receivables
assigned to factor
|
|
$
|
8,385
|
|
$
|
8,346
|
|
Client recourse
receivables
|
|
802
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|
778
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|
Total receivables assigned to factor
|
|
9,187
|
|
9,124
|
|
Allowance for customer credits and doubtful accounts
|
|
(1,384
|
)
|
(1,421
|
)
|
Net loan balance from factored accounts receivable
|
|
(7,212
|
)
|
(6,201
|
)
|
Net loan balance from inventory advances
|
|
(3,930
|
)
|
(4,542
|
)
|
Due to factor
|
|
$
|
(3,339
|
)
|
$
|
(3,040
|
)
|
|
|
|
|
|
|
Non-factored accounts
receivable
|
|
$
|
1,288
|
|
$
|
1,455
|
|
Allowance for customer
credits and doubtful accounts
|
|
(708
|
)
|
(652
|
)
|
Accounts receivable and due from factor, net of allowance
|
|
$
|
580
|
|
$
|
803
|
|
Of
the total amount of receivables sold by Joes as of February 29, 2008 and November 30,
2007, Joes bears the risk of payment of $802,000 and $778,000, respectively,
in the event of non-payment by the customers.
6
CIT
Commercial Services
On
June 1, 2001, the Joes Jeans Subsidiary entered into the accounts
receivable factoring agreement and inventory security agreement with CIT. In prior years, Joes other active
subsidiaries also entered into substantially identical agreements. These agreements give Joes the ability to
obtain cash by selling to CIT certain of its accounts receivable. The accounts receivables are sold for up to
85 percent of the face amount on either a recourse or non-recourse basis
depending on the creditworthiness of the customer. In addition, the agreements allow Joes to
obtain advances for up to 50 percent of the value of certain eligible
inventory. CIT currently permits Joes
to sell its accounts receivables at the maximum level of 85 percent and allows
advances of up to $6,000,000 for eligible inventory. CIT has the ability, in its discretion at any
time or from time to time, to adjust or revise any limits on the amount of
loans or advances made to Joes pursuant to these agreements. As further assurance to CIT, cross guarantees
were executed by and among Joes and all of its subsidiaries to guarantee each
subsidiaries obligations.
As
of February 29, 2008, Joes cash availability with CIT was approximately
$269,000. This amount fluctuates on a
daily basis based upon invoicing and collection related activity by CIT for the
receivables sold. In connection with the
agreements with CIT, certain assets are pledged to CIT, including all of the
inventory, merchandise, and/or goods, including raw materials through finished
goods and receivables.
The
agreements may be terminated by CIT upon 60 days written notice or immediately
upon the occurrence of an event of default, as defined in the agreement. The agreements may be terminated by Joes
upon 60 days written notice prior to June 30, 2010 or earlier provided
that the minimum factoring fees have been paid for the respective period.
The
factoring rate that Joes pays to CIT to factor accounts is at 0.6 percent for
accounts which CIT bears the credit risk and 0.4 percent for accounts which Joes
bears the credit risk and the interest rate associated with borrowings under
the inventory lines and factoring facility is at 0.25 percent plus the Chase
prime rate. As of February 29,
2008, the Chase prime rate was six percent.
In
addition, in the event Joes needs additional funds, Joes has also established
a letter of credit facility with CIT to allow it to open letters of credit for
a fee of 0.25 percent of the letter of credit face value with international and
domestic suppliers, subject to availability.
At February 29, 2008, Joes had 11 letters of credit outstanding in
the aggregate amount of $680,000.
7
NOTE 4
INVENTORIES
Inventories
are valued at the lower of cost or market with cost determined by the first-in,
first-out method. Inventories consisted
of the following (in thousands):
|
|
February 29, 2008
|
|
November 30, 2007
|
|
Finished goods
|
|
$
|
7,652
|
|
$
|
7,450
|
|
Work in progress
|
|
2,043
|
|
1,998
|
|
Raw materials
|
|
10,522
|
|
11,969
|
|
|
|
20,217
|
|
21,417
|
|
Less allowance for
obsolescence and slow moving items
|
|
(655
|
)
|
(614
|
)
|
|
|
$
|
19,562
|
|
$
|
20,803
|
|
Joes
recorded charges to its inventory reserve allowance of $22,000 and $0 for the
three months ended February 29, 2008 and February 24, 2007,
respectively.
NOTE 5
MERGER
TRANSACTION
Merger
Agreement
Joes,
Joes Subsidiary, JD Holdings, Inc., or JD Holdings, and Joseph Dahan, the
sole stockholder of JD Holdings, entered into a definitive Agreement and Plan
of Merger on February 6, 2007, as amended on June 25, 2007, or the
Merger Agreement. JD Holdings primary
asset is all rights, title and interest in all intellectual property, including
the trademarks, related to the Joes®, Joes Jeans and JD brand and marks, or
the Joes Brand. At the time of entering
into the Merger Agreement, Mr. Dahan was a current employee of Joes,
serving as president of Joes Subsidiary.
In addition, JD Holdings was the successor to JD Design, the entity from
whom Joes licensed the Joes Brand. The
license agreement terminated automatically upon completion of the merger.
Under
the terms and subject to the conditions set forth in the Merger Agreement, on October 25,
2007, the Joes and JD Holdings completed the merger. In connection with the merger, Joes
Subsidiary merged with and into JD Holdings, with Joes Subsidiary as the
surviving entity and a wholly owned subsidiary of Joes. In addition, Joes issued 14,000,000 shares
of its common stock, made a cash payment of $300,000 to JD Holdings in exchange
for all of its outstanding shares and incurred $93,000 of merger related
expenses. As a result of the merger, Joes now owns all rights, title and
interest in the Joes Brand.
Furthermore,
under the revised Merger Agreement, Mr. Dahan will continue to be entitled
to, for a period of 120 months following October 25, 2007, a certain
percentage of the gross profit earned by Joes in any applicable fiscal
year. The additional merger
consideration, or earn-out, will be paid in advance on a monthly basis based
upon estimates of gross profits after the assumption has been reached that the
payments will likely be paid. At the end
of each quarter, any overpayments will be offset against future payments and any
significant underpayments will promptly be made. Advanced earn-out payments are recorded as
additional goodwill. As of February 29,
2008, Joes has recorded $441,000 as additional goodwill. See Note 10 Commitments and Contingencies
Earn Out for a further discussion of the earn-out obligation. In addition, the Merger Agreement contains a
restrictive covenant relating to non-competition and non-solicitation for one
year following the termination of Mr. Dahans service.
Effective
upon completion of the merger, on October 25, 2007, Mr. Dahan became
an officer, director and greater than 10 percent stockholder of Joes. In connection with the completion of the
merger, an Employment Agreement and Investor Rights Agreement became effective.
8
The
merger has been accounted for as a purchase under U.S. generally accepted
accounting principles. Accordingly, management, with the assistance from
independent valuation specialists, has allocated the purchase price to the
assets and liabilities of JD Holdings in Joes financial statements as of the
completion of the merger at their respective fair values. The valuations of intangible assets, income
taxes and certain other items are preliminary and Joes expects to finalize the
purchase price allocations in the second quarter of fiscal 2008.
The
assets acquired in this merger consisted of intangible assets. JD Holdings had an immaterial amount of other
assets, including incidental office equipment that were distributed to Mr. Dahan
as the sole stockholder prior to the closing of the transaction. Pursuant to the Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, Joes
has determined that the useful life of the acquired assets is indefinite and
therefore no amortization expense will initially need to be recognized.
However, Joes will test the assets for impairment annually and/or if events or
changes in circumstances indicate that the assets might be impaired.
Additionally, a deferred tax liability has been established in the allocation
of the purchase price with respect to the identified indefinite long lived
intangible assets acquired.
Employment
Agreement
In
connection with the completion of the Merger, Mr. Dahans employment
agreement automatically became effective upon the closing of the merger for Mr. Dahan
to serve as Creative Director for the Joes Brand.
The
initial term of employment is five years with automatic renewals for successive
one year periods thereafter, unless terminated earlier in accordance with the
agreement. Under the employment agreement, Mr. Dahan is entitled to an
annual salary of $300,000 and other discretionary benefits that the
Compensation Committee of the Board of Directors may deem appropriate in its
sole and absolute discretion.
Under
the terms of the employment agreement, Joes may terminate Mr. Dahan for
cause or if he becomes disabled, as defined in the agreement. Should Joes terminate Mr. Dahans
employment for cause or disability, Joes would only be required to pay him
through the date of termination. Joes may terminate Mr. Dahans
employment without cause at any time upon two weeks notice, provided that it
pays to him the present value of the annual salary amounts otherwise due to him
for the remainder of the initial term of employment or any renewal term. Mr. Dahan
may terminate his employment for good reason at any time within 30 days written
notice. In the event that Mr. Dahan
terminates his employment for good reason, then he will be entitled to the
present value of the annual salary amounts otherwise due to him for the
remainder of the term of employment. Further, Mr. Dahan may terminate his
employment for any reason upon ten business days notice and only be entitled
to his salary as of the date of termination on a pro rata basis.
The
employment agreement contains customary terms and conditions related to
confidentiality of information, ownership by Joes of all intellectual
property, including future designs and trademarks, alternative dispute
resolution and Mr. Dahans duties and responsibilities to Joes and the
Joes Brand as Creative Director.
Investor
Rights Agreement
Upon
the closing of the Merger, Joes also entered into an investor rights
agreement. Pursuant to the investor
rights agreement, Joes agreed to register for resale, on a periodic basis at
the request of Mr. Dahan, the shares of common stock eligible for resale
issued in connection with the Merger. The shares of
9
common
stock issued as Merger consideration become eligible for resale beginning on
the six month anniversary of the closing date of the Merger at an initial rate
of 1/6 of the shares issued and every six months thereafter at the same rate
until all the shares are fully released on the third anniversary of the closing
date. Joes agreed to bear all expenses
associated with registering these shares for resale and have granted to Mr. Dahan
certain piggyback rights with respect to future registration statements filed
by Joes. The investor rights agreement contains customary terms and conditions
related to registration procedures, trading suspensions and indemnification of
the parties. On March 24, 2008, a
registration statement on Form S-3 was declared effective for the resale
of up to 2,333,333 shares held by Mr. Dahan. His contractual restrictions on resale for
those shares lapse on April 25, 2008.
NOTE 6
RELATED PARTY TRANSACTIONS
JD
Holdings Inc.
On
February 7, 2001, Joes acquired a license for the rights to the Joes®
brand from JD Design LLC, which was subsequently merged with and into JD
Holdings. Under the license agreement,
JD Holdings was entitled to a royalty of three percent on net sales of licensed
products. In October 2005, Joes
granted JD Holdings the right to develop the childrens branded apparel line
under an amendment to its master license agreement in exchange for a five
percent royalty on net sales of those products.
On October 25, 2007, in connection with the merger, the license
agreement terminated.
As
part of the consideration paid in connection with the completion of the merger,
Mr. Dahan will be entitled to a certain percentage of the gross profit
earned by Joes in any applicable fiscal year until October 2017. See Note 5 Merger Transaction for a
further discussion on the merger agreement and the earn-out.
For
the three months ended February 29, 2008, Joes paid $316,000 in earn out
payments and for the three months ended February 24, 2007, $395,000 in
royalties in connection with the Joes® brand.
Mr. Dahans
brother is the managing member of a company Shipson LLC, or Shipson, to whom
Joes outsourced its E-shop on its Joes Jeans website. Joes sold its Joes® products to Shipson at
its wholesale price on normal and customary terms and conditions to fulfill
purchases by customers on the E-shop.
Joes ceased doing business with Shipson in February 2008. As of February 29, 2008, Shipson
currently owes $192,000 to Joes for outstanding purchase orders and this
amount has been fully reserved for in its financial statements.
In
October 2006, Joes entered into a collateral protection agreement with JD
Holdings in connection with the pledge of certain collateral to CIT for
increased availability. Under the collateral
protection agreement, Joes agreed to issue JD Holdings shares of its common
stock in the event of a default under its agreements with CIT. In October 2007, in connection with the
merger and the release of the pledge by CIT, the collateral protection
agreement was terminated.
10
NOTE 7
EARNINGS PER SHARE
Earnings
(loss) per share are computed using weighted average common shares and dilutive
common equivalent shares outstanding. Potentially dilutive securities consist
of outstanding options and warrants. A reconciliation of the numerator and
denominator of basic earnings per share and diluted earnings per share is as
follows:
|
|
Three months ended
|
|
|
|
(in thousands, except per share data)
|
|
|
|
February 29, 2008
|
|
February 24, 2007
|
|
Basic earnings per share
computation:
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
843
|
|
$
|
(173
|
)
|
Denominator:
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
59,261
|
|
39,450
|
|
Income (loss) per common share
- basic
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.01
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
Diluted earnings per share
computation:
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
843
|
|
$
|
(173
|
)
|
Denominator:
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
59,261
|
|
39,450
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Options and warrants
|
|
297
|
|
|
|
Dilutive potential common
shares
|
|
59,558
|
|
39,450
|
|
|
|
|
|
|
|
Income (loss) per common share
- dilutive
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.01
|
|
$
|
(0.00
|
)
|
Potentially
dilutive options, warrants, restricted stock and restricted stock units in the
aggregate of 3,573,097 and 7,045,933 for the three months ended February 29,
2008 and February 24, 2007, respectively, have been excluded from the
calculation of the diluted loss per share, as their effect would have been
anti-dilutive.
Shares Reserved for Future
Issuance
As
of February 29, 2008, shares reserved for future issuance include (i) 3,282,296
shares of common stock issuable upon the exercise of vested outstanding stock
options; (ii) 744,600 shares of common stock issuable upon the vesting of
restricted stock units; (iii) an aggregate of 3,376,390 shares of common
stock available for future issuance under the 2004 Stock Incentive Plan as of February 29,
2008; and (iv) 1,383,333 shares of common stock issuable upon the exercise
of outstanding warrants.
NOTE 8
INCOME
TAXES
Joes
utilizes the liability method of accounting for income taxes in accordance with
SFAS No. 109. Under the liability
method, deferred taxes are determined based on the temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates.
Valuation
allowances are established, when necessary, to reduce deferred tax assets to
the amount expected to be realized. The likelihood of a material change in Joes
expected realization of these assets depends on its ability to generate
sufficient future taxable income. Joes ability to generate enough taxable
income to utilize its deferred tax assets depends on many factors, among which
is Joes ability to deduct tax loss carry-forwards against future taxable
income, the effectiveness of tax planning strategies and reversing deferred tax
liabilities.
11
In
June 2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes An Interpretation of FASB Statement 109. FIN No. 48 establishes a single model to
address accounting for uncertain tax positions.
FIN No. 48 clarifies the accounting for income taxes by prescribing
a minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements.
FIN No. 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. Joes adopted
the provisions of FIN No. 48 on December 1, 2007. Upon adoption, Joes did not recognize an
adjustment in the amount of unrecognized tax benefits. As of the date of adoption, Joes had no
unrecognized tax benefits. Joes policy
is to recognize interest and penalties that would be assessed in relation to
the settlement value of unrecognized tax benefits as a component of income tax
expense.
Joes
and its subsidiaries are subject to U.S. federal income tax as well as income
tax in multiple state jurisdictions. To
the extent allowed by law, the tax authorities may have the right to examine
prior periods where net operating losses were generated and carried forward,
and make adjustments up to the amount of the net operating loss carryforward
amount. Joes is not currently under an
Internal Revenue Service tax examination or an examination by any other state,
local or foreign jurisdictions.
Joes
recorded an income tax expense of $62,000 and $8,000 for the three months ended
February 29, 2008, and February 24, 2007, respectively. Joes effective tax rate was seven percent
for the first quarter of fiscal 2008.
For the first quarter of fiscal 2007, the tax provision consisted of
state franchise taxes due to a net loss.
For the three months ended February 29, 2008 and February 24,
2007, the difference between the effective tax rate and the statutory rate is
primarily attributable to the utilization of net operation loss tax
carryforwards against which a full valuation allowance has been established.
NOTE 9
STOCKHOLDERS EQUITY
Warrants
Joes
has issued warrants in conjunction with various private placements of its
common stock, debt to equity conversions, acquisitions and in exchange for
services. All warrants are currently exercisable. As of February 29, 2008, outstanding
common stock warrants are as follows:
Exercise price
|
|
Shares
|
|
Issued
|
|
Expiration
|
|
$
|
4.50
|
|
200,000
|
|
June 2003
|
|
June 2008
|
|
3.62
|
|
17,500
|
|
August 2003
|
|
August 2008
|
|
4.00
|
|
373,333
|
|
November 2003
|
|
November 2008
|
|
1.53
|
|
125,000
|
|
June 2004
|
|
June 2009
|
|
2.28
|
|
62,500
|
|
October 2004
|
|
October 2009
|
|
0.66
|
|
125,000
|
|
December 2006
|
|
December 2011
|
|
1.36
|
|
480,000
|
|
June 2007
|
|
June 2012
|
|
|
|
1,383,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Stock Incentive Plans
In
March 2000, Joes adopted the 2000 Employee Stock Option Plan, or the 2000
Employee Plan. In connection with
stockholder approval of the 2004 Stock Incentive Plan, Joes stated that it
would no longer grant options pursuant to the 2000 Employee Plan, however, it
remained in effect for awards outstanding as of June 3, 2004. In December 2007, the outstanding
options remaining under the 2000 Employee Plan expired and currently there are
no options outstanding. Upon expiration
of the outstanding option awards, the 2000 Employee Plan terminated.
In
September 2000, Joes adopted the 2000 Director Stock Incentive Plan, or
the 2000 Director Plan, under which nonqualified stock options were granted to
members of the Board of Directors in lieu of cash director fees. After the adoption of the 2004 Stock
Incentive Plan in June 2004, Joes no longer granted options pursuant to
the 2000 Director Plan; however, it remains in effect for awards outstanding as
of the adoption of the 2004 Stock Incentive Plan. As of February 29, 2008, options to
purchase up to 203,546 remained outstanding under the 2000 Director Plan.
On
June 3, 2004, Joes adopted the 2004 Stock Incentive Plan, or the 2004
Incentive Plan, and has subsequently amended it to increase the number of shares
authorized for issuance to 8,265,172 shares of common stock. Under the 2004 Incentive Plan, grants may be
made to employees, officers, directors and consultants under a variety of
awards based upon underlying equity, including, but not limited to, stock
options, restricted common stock, restricted stock units or performance
shares. The 2004 Incentive Plan limits
the number of shares that can be awarded to any employee in one year to
1,250,000. Exercise price for incentive
options may not be less than the fair market value of Joes common stock on the
date of grant and the exercise period may not exceed ten years. Vesting periods, terms and types of awards
are determined by the Board of Directors and/or its Compensation and Stock
Option Committee, or Compensation Committee.
The 2004 Incentive Plan includes a provision for the acceleration of
vesting of all awards upon a change of control as well as a provision that
allows forfeited or unexercised awards that have expired to be available again
for future issuance. During the fourth
quarter of fiscal 2007, Joes granted 555,849 shares of restricted common stock
to its directors and CEO pursuant to the 2004 Stock Incentive Plan. In December 2007,
Joes issued 745,600 restricted common stock units, or RSUs, to its employees
pursuant to the 2004 Stock Incentive Plan.
These RSUs represent the right to receive one share of common stock for
each unit on the vesting date provided that the employee continues to be
employed by Joes. The RSUs vest ratably
every six months with the first tranche vesting on June 18, 2008 until all
of the RSUs are vested on December 18, 2011. On the vesting date, Joes
expects to issue the shares of common stock to each employee that he or she is
vested in and expects to withhold an equivalent number of shares at fair market
value on the vesting date to fulfill each employees minimum tax withholding
obligation. In the fourth quarter of
fiscal 2007, Joes granted an option to purchase 100,000 shares that vested on
a monthly basis over a two year period; however, this option was cancelled and
replaced with the consent of the option holder with RSUs for 100,000 shares of
common stock in December 2007. As
of February 29, 2008, 1,000 RSUs have been forfeited by employees.
The
shares of common stock issued upon exercise of a previously granted stock
option or a grant of restricted common stock or RSUs are considered new
issuances from shares reserved for issuance in connection with the adoption of
the various plans. Joes requires that the
option holder provide a written notice of exercise in accordance with the
option agreement and plan to the stock plan administrator and full payment for
the shares be made prior to issuance.
All issuances are made under the terms and conditions set forth in the
applicable plan. As of February 29,
2008, 3,376,390 shares remained available for issuance under the 2004 Incentive
Plan.
For
all stock compensation awards that contain graded vesting with time-based
service conditions, Joes has elected to apply a straight-line recognition
method to account for all of these awards.
For existing grants that were not fully vested at November 30,
2007, there was a total of $213,000 of stock based compensation expense
recognized in the first quarter of fiscal 2008.
13
The
following summarizes option grants and restricted common stock issued to
members of the Board of Directors for the fiscal years 2002 through the first
quarter of fiscal 2008 (in actual amounts) for service as a member:
February 29, 2008
|
|
As of:
|
|
Number of options
|
|
Exercise price
|
|
2002
|
|
40,000
|
|
$1.00
|
|
2002
|
|
31,496
|
|
$1.27
|
|
2003
|
|
30,768
|
|
$1.30
|
|
2004
|
|
320,000
|
|
$1.58
|
|
2005
|
|
300,000
|
|
$5.91
|
|
2006
|
|
450,000
|
|
$1.02
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of restricted
shares isssued
|
|
2007
|
|
|
|
320,000
|
|
Stock
activity in the aggregate for the periods indicated are as follows (in actual
amounts):
|
|
Options
|
|
Weighted
average exercise
price
|
|
Weighted average remaining contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at
November 30, 2007
|
|
3,626,046
|
|
$
|
1.80
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Expired
|
|
(200,000
|
)
|
2.40
|
|
|
|
|
|
Forfeited
|
|
(100,000
|
)
|
1.98
|
|
|
|
|
|
Outstanding at
February 29, 2008
|
|
3,326,046
|
|
$
|
1.76
|
|
6.4
|
|
$
|
268,803
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable and vested at
February 29, 2008
|
|
3,282,296
|
|
$
|
1.78
|
|
6.4
|
|
$
|
239,139
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average per option fair value of options granted during the
year
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
average exercise
price
|
|
Weighted
average remaining contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at
November 26, 2006
|
|
4,092,296
|
|
$
|
1.68
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
Outstanding at
February 24, 2007
|
|
4,092,296
|
|
$
|
1.68
|
|
7.8
|
|
$
|
174,841
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable and vested at
February 24, 2007
|
|
3,973,546
|
|
$
|
1.72
|
|
7.7
|
|
$
|
101,216
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average per option fair value of options granted during the
year
|
|
|
|
N/A
|
|
|
|
|
|
14
As
of February 29, 2008, there was $1,528,000 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
granted under the 2004 Incentive Plan.
That unrecognized compensation cost is expected to be recognized over a
weighted
-average period
of 3.0 years. The total fair value of
shares of stock options vested during the three months ended February 29,
2008, and February 24, 2007 was $7,000 and $5,000, respectively, and
$206,000 for restricted common stock.
Exercise
prices for options outstanding as of February 29, 2008 are as follows:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Exercise Price
|
|
Number of shares
|
|
Weighted-Average
Remaining Contractual
Life
|
|
Number of options vested
|
|
Weighted-Average
Remaining Contractual
Life
|
|
$0.39
- $0.41
|
|
190,064
|
|
5.5
|
|
146,314
|
|
4.5
|
|
$1.00
- $1.02
|
|
2,015,000
|
|
6.4
|
|
2,015,000
|
|
6.4
|
|
$1.27
- $1.30
|
|
60,982
|
|
5.0
|
|
60,982
|
|
5.0
|
|
$1.58
- $1.63
|
|
610,000
|
|
6.4
|
|
610,000
|
|
6.4
|
|
$5.91
|
|
450,000
|
|
7.3
|
|
450,000
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,326,046
|
|
6.4
|
|
3,282,296
|
|
6.4
|
|
The
following table summarizes the stock option activity by plan.
|
|
Total Number
of Shares
|
|
2004 Incentive
Plan
|
|
2000 Employee
Plan
|
|
2000 Director
Plan
|
|
Outstanding at
November 30, 2007
|
|
3,626,046
|
|
3,222,500
|
|
200,000
|
|
203,546
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Forfeited / Cancelled
|
|
(300,000
|
)
|
(100,000
|
)
|
(200,000
|
)
|
|
|
Outstanding at
February 29, 2008
|
|
3,326,046
|
|
3,122,500
|
|
|
|
203,546
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
February 29, 2008
|
|
3,282,296
|
|
3,078,750
|
|
|
|
203,546
|
|
There
were no options granted or exercised in the first quarter of fiscal 2008.
15
A summary of the status of
restricted common stock and RSUs as of November 30, 2007, and changes
during the three months ended February 29, 2008, is presented below:
|
|
|
|
|
|
|
|
Weighted-Average Grant-Date Fair
Value
|
|
|
|
Restricted
Shares
|
|
Restricted Stock
Units
|
|
Total Shares
|
|
Restricted
Shares
|
|
Restricted Stock
Units
|
|
Outstanding at
November 30, 2007
|
|
529,182
|
|
|
|
529,182
|
|
$
|
1.59
|
|
$
|
|
|
Granted
|
|
|
|
745,600
|
|
745,600
|
|
|
|
1.46
|
|
Vested
|
|
(80,000
|
)
|
|
|
(80,000
|
)
|
(1.59
|
)
|
|
|
Forfeited
|
|
|
|
(1,000
|
)
|
(1,000
|
)
|
|
|
(1.46
|
)
|
Outstanding at
February 29, 2008
|
|
449,182
|
|
744,600
|
|
1,193,782
|
|
$
|
1.59
|
|
$
|
1.46
|
|
NOTE 10 COMMITMENTS AND CONTINGENCIES
Earn Out
As part of the consideration
paid in connection with the completion of the merger, Mr. Dahan will be
entitled to a certain percentage of the gross profit earned by Joes in any
applicable fiscal year until October 2017.
Mr. Dahan will be entitled to the following: (i) 11.33 percent
of the gross profit from $11,251,000 to $22,500,000; plus (ii) three
percent of the gross profit from $22,501,000 to $31,500,000; plus (iii) two
percent of the gross profit from $31,501,000 to $40,500,000; plus (iv) one
percent of the gross profit above $40,501,000. The payments will be made in
advance and then be compared against amounts actually earned after the
applicable quarter or fiscal year with shortfalls paid immediately and
overpayments offset against future earnings. No payment will be made if the
gross profit is less than $11,250,000. Gross Profit is defined as net sales
of the Joes® brand less cost of goods sold as reported in periodic filings
with the SEC.
Retail Leases
In
January 2008, Joes entered into a lease agreement for the lease of retail
space at Woodbury Common Premium Outlets® in Central Valley, New York. Under the lease agreement, Joes takes
possession of the space on August 1, 2008 and expects to open its retail
outlet in the fall of 2008. The term of
the lease is for 10 years and the annual base rent be $147,000 plus an
obligation to pay certain advertising fees, operating costs charges, a
percentage rent based upon sales and other customary charges for retail leased
space. The rent and other operating
charges will increase at a fixed rate or based upon inflation after the first
year and thereafter until the end of the term.
NOTE 11 SEASONALITY
The
market for apparel products is seasonal.
The majority of Joes sales activities take place from late fall to
early spring and the greatest volume of shipments and sales are generally made
from late spring through the summer.
This time period coincides with Joes second and third fiscal quarters
and its cash flow is generally strongest in its third and fourth fiscal
quarters when a significant amount of its net sales are realized as a result of
shipping orders taken during earlier months.
In the second quarter in order to prepare for peak sales that occur
during the second half of the year, Joes builds its inventory levels, which
results in higher liquidity needs compared to other quarters. During this period, Joes typically relies on
its relationship with CIT for the sale of its account receivables and inventory
advances to meet its cash flow requirements during the build up period
immediately preceding the peak season.
Joes working capital requirements during and in anticipation of its
peak selling season require management to make and evaluate its estimates and
judgments that affect its assets, liabilities, sales and expenses and any
related contingencies.
16
Due
to the seasonality of its business, as well as the evolution and changes in its
business and product mix, Joes quarterly or yearly results are not necessarily
indicative of the results for the next quarter or year.
NOTE 12 SUBSEQUENT EVENTS
In
March 2008, Joes entered into a lease agreement for the lease of retail
space at Orlando Premium Outlets® in Orlando, Florida. Under the lease agreement, Joes takes
possession of the space on September 1, 2008 and expects to open its
retail outlet in the fall of 2008. The
term of the lease is for 10 years and the annual base rent is $179,000 plus an
obligation to pay certain advertising fees, operating costs charges, a
percentage rent based upon sales and other customary charges for retail leased
space. The rent and other operating
charges will increase at a fixed rate or based upon inflation after the first
year and thereafter until the end of the term.
17
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
Forward-Looking Statements
When
used in this Quarterly Report on Form 10-Q, or Quarterly Report, the words
may, will, expect, anticipate, intend, estimate, continue, believe
and similar expressions are intended to identify forward-looking
statements. Similarly, statements that
describe our future expectations, objectives and goals or contain projections
of our future results of operations or financial condition are also
forward-looking statements. Statements
looking forward in time are included in this Quarterly Report pursuant to the safe
harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks
and uncertainties, which could cause actual results to differ materially,
including, without limitation, continued acceptance of our product, product
demand, competition, capital adequacy and the potential inability to raise
additional capital if required, and the risk factors contained in our reports
filed with the Securities and Exchange Commission, or SEC, pursuant to the
Securities Exchange Act of 1934, as amended, including our Annual Report on Form 10-K
for the year ended November 30, 2007 and Amendment No. 1 to our
Annual Report of Form 10-K/A, or collectively, the Annual Report. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. Our future results, performance
or achievements could differ materially from those expressed or implied in
these forward-looking statements. We do
not undertake and specifically decline any obligation to publicly revise these
forward-looking statements to reflect events or circumstances occurring after
the date hereof or to reflect the occurrence of unanticipated events.
The
following discussion provides information and analysis of our results of operations
for the three month periods ended February 29, 2008 and February 24,
2007, and our liquidity and capital resources.
The following discussion and analysis should be read in conjunction with
our notes to our accompanying condensed consolidated financial statements
included elsewhere herein.
Introduction
This
discussion and analysis summarizes the significant factors affecting our
results of operations and financial condition during the three month periods
ended February 29, 2008 and February 24, 2007. This discussion should be read in conjunction
with our accompanying condensed consolidated financial statements, our notes to
condensed consolidated financial statements and supplemental information in
Item 1 of this Quarterly Report. The
discussion and analysis contains statements that may be considered
forward-looking. These statements
contain a number of risks and uncertainties as discussed here, under the
heading Forward-Looking Statements of this Quarterly Report that could cause
actual results to differ materially.
Executive
Overview
Our
principal business activity has evolved into the design, development and
worldwide marketing of Joes® products, which include denim jeans, related
casual wear and accessories. Since Joes®
was established in 2001, the brand is recognized in the premium denim industry,
an industry term for denim jeans with price points of $120 or more, for its
quality, fit and fashion-forward designs.
Because we focus on design, development and marketing, we rely on third
parties to manufacture our apparel products and for distribution and product
fulfillment services. We sell our
products to numerous retailers, which include major department stores,
specialty stores and distributors around the world. Historically, we sold other branded apparel
products, such as indie, Betsey Johnson®, Fetish and Shago®, private label
denim and denim related products and craft and accessory products, but had no
sales of such products after fiscal 2006.
18
In
fiscal 2007, we continued to implement our transition plan to focus our
operations on our Joes® brand. Our
transition plan included selling the assets or ceasing operations of our other
branded and private label apparel products.
To enhance our ability to capitalize on the Joes® brand, on February 6,
2007, we entered into a merger agreement to merge with JD Holdings Inc., or JD
Holdings, the successor in interest to JD Design LLC, or JD Design, the entity
from whom we licensed the Joes® brand.
We also entered into our first license agreement for other product
categories for handbags, belts and small leather goods bearing the Joes®
brand. In October 2007, we
completed the merger and acquired the Joes® brand. In exchange for all of the rights for the Joes®
brand, we issued 14,000,000 shares of our common stock, $300,000 in cash and
entered into an employment agreement with Joe Dahan, the principal designer and
sole stockholder of JD Holdings. As part
of the merger consideration, we are also obligated to pay Mr. Dahan a
percentage of our gross profits until 2017 above $11,251,000. In addition to owning approximately 24
percent of our total shares outstanding, after the merger, Mr. Dahan
became an executive officer and a member of our Board of Directors.
We
reported net income for the full fiscal year of 2007 for the first time since
2002 and reported net income for the first quarter of fiscal 2008 compared to a
net loss in the first quarter of fiscal 2007.
While we have strived to reduce costs and implement cost saving measures
in order to generate net income, there can be no assurance that we can continue
to improve our net sales, gross profit or maintain expenses in order to
continue to generate net income. Our
strategic plan for 2008 includes entering into lease agreements to open retail
and outlet stores, improving international sales, increasing sales from our mens
and childrens product lines, evaluating licensing opportunities for other
product categories and enhancing the quality, fit and products available in our
collection beyond denim bottoms. In the
first half of fiscal 2008, we entered into two leases for retail outlet space
at Woodbury Common Premium Outlets® in Central Valley, New York and Orlando
Premium Outlets® in Orlando, Florida. We
expect to open the stores in the fall of 2008.
Outlet centers will allow us to sell our overstock or slow moving items
at better profit margins. We are
actively looking for other retail leases that may allow us to open stores earlier;
however, there can be no assurance that we will be able to do so. In addition, we have been focusing on
designing an entire collection of products to be available and showcased in
retail stores. To improve international
sales, we hired two consultants based in Europe to assist us in entering into
agent and distributor agreements worldwide.
We believe that entering into agent and distributor agreements directly
will improve our profit margins and give us the ability to strategically grow
international sales.
Our
business is seasonal. The majority of
the marketing and sales activities take place from late fall to early
spring. The greatest volume of shipments
and sales are generally made from late spring through the summer, which
coincides with our second and third fiscal quarters and our cash flow is
strongest in our third and fourth fiscal quarters. Due to the seasonality of our business, as
well as the evolution and changes in our business and product mix, often our
quarterly or yearly results are not necessarily indicative of the results for
the next quarter or year.
In
October 2007, we changed our fiscal year end from a thirteen-week
quarterly reporting period to a last day of the month quarterly reporting
period to reflect standard quarterly accounting periods. The modification of the fiscal year or
quarters did not have a material effect on our financial condition, results of
operations or cash flows.
19
Results of Operations
The
following table sets forth certain statements of operations data for the
periods as indicated:
|
|
Three months ended
|
|
|
|
(dollar values in thousands)
|
|
|
|
February 29, 2008
|
|
February 24, 2007
|
|
$ Change
|
|
% Change
|
|
Net sales
|
|
$
|
15,210
|
|
$
|
13,814
|
|
$
|
1,396
|
|
10
|
%
|
Cost of goods sold
|
|
8,422
|
|
8,719
|
|
(297
|
)
|
(3
|
)%
|
Gross profit
|
|
6,788
|
|
5,095
|
|
1,693
|
|
33
|
%
|
Gross margin
|
|
45
|
%
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative
|
|
5,604
|
|
4,982
|
|
622
|
|
12
|
%
|
Depreciation &
amortization
|
|
87
|
|
88
|
|
(1
|
)
|
(1
|
)%
|
Operating income
|
|
1,097
|
|
25
|
|
1,072
|
|
4,288
|
%
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(192
|
)
|
(193
|
)
|
1
|
|
(1
|
)%
|
Other expense
|
|
|
|
3
|
|
(3
|
)
|
(100
|
)%
|
Income (loss) before provision for taxes
|
|
905
|
|
(165
|
)
|
1,070
|
|
(648
|
)%
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
62
|
|
8
|
|
54
|
|
675
|
%
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
843
|
|
$
|
(173
|
)
|
$
|
1,016
|
|
(587
|
)%
|
Comparison of Three Months Ended February 29, 2008 to Three Months
Ended February 24, 2007
Three Months Ended February 29, 2008 Overview
For
the three months ended February 29, 2008, or the first quarter of fiscal
2008, our net sales increased to $15,210,000 from $13,814,000 for the three
months ended February 24, 2007, or the first quarter fiscal 2007, a 10
percent increase. We generated net
income in the amount of $843,000 for the first quarter of fiscal 2008 compared
to a net loss of $173,000 for the first quarter of fiscal 2007.
The
primary reasons for the shift to net income from the first quarter of fiscal
2008 compared to a net loss in the first quarter of fiscal 2007 were the
following:
·
a 10 percent growth in our net sales for Joes®
products; and
·
a 33 percent improvement in our gross profit
for Joes® products and corresponding improvement in gross margins to 45
percent from 37 percent.
Net Sales
Our
net sales increased to $15,210,000 for the first quarter of fiscal 2008 from
$13,814,000 for the first quarter of fiscal 2007, a 10 percent increase. This increase can be attributed to a
continued strong demand for denim apparel products in the marketplace coupled
with brand acceptance for Joes® products in the premium denim market and
growth in our mens line. As a result of
increased brand acceptance and awareness of Joes® products, in the first
quarter of fiscal 2008, we continued to experience growth in the number of
department store doors carrying our products, as well as increases in the
average inventory per door as we increased the number of retailers
participating in our replenishment program for our core basic styles offered
continuously throughout the year. We
experienced growth in sales volume from retail stores carrying our products,
including increases in sales from our mens line.
20
We
also experienced an $662,000 increase in international sales over the first
quarter of fiscal 2007 due to shifting our international strategy from a third
party distribution agreement that we terminated in February 2007 to hiring
two consultants based in Europe to assist us in directly entering into agent
and distribution agreements worldwide.
Gross Profit
Our
gross profit increased to $6,788,000 for the first quarter of fiscal 2008 from
$5,095,000 for the first quarter of fiscal 2007, a 33 percent increase. Our overall gross margin increased to 45
percent for the first quarter of fiscal 2008 from 37 percent for the first
quarter of fiscal 2007, an eight percentage point increase.
The
increase in our gross profit and gross margin percentage was primarily due to
an increase by approximately eight percent of the amount of products manufactured
outside of the U.S., which generally results in a lower cost of production, as
we continue to explore alternative avenues for production. As a result, our gross profit and gross
margins improved from the first quarter of fiscal 2007 to 2008.
Selling, General and Administrative Expense
Selling,
general and administrative, or SG&A, expenses increased to $5,604,000 for
the first quarter of fiscal 2008 from $4,982,000 for the first quarter of
fiscal 2007, a 12 percent increase.
The
SG&A increase in the first quarter of fiscal 2008 compared to the first
quarter of fiscal 2007 is largely a result of the following factors: (i) an
increase of $313,000 in employee and employee-related expenses due to a higher
headcount in the first quarter of fiscal 2008 compared to fiscal 2007 to
support our growth and implementation of our strategic initiatives, including
personnel to support our retail strategy; (ii) an increase of $234,000 in
sample expenses to support our development of a full collection of items; (iii) an
increase of $208,000 in stock-based compensation expense due to the issuance of
restricted common stock and restricted stock units in the fourth quarter of
fiscal 2007 and first quarter of fiscal 2008, respectively; (iv) an
increase of $207,000 in facilities and distribution related expenses due to
entering into a distribution agreement with a third party in Europe to support
our international sales initiatives and customary increases in rates for our
distribution services in the U.S.; (v) an increase of $91,000 in
professional fees primarily due to the engagement of our consultants in Europe;
(vi) an increase of $56,000 in advertising and tradeshow expenses; and (vii) an
increase of $47,000 in factor and bank fees due to the increase in our net
sales. These increases were partially
offset by (i) a decrease of $316,000 in other fees primarily due to a
decrease in bad debt expense; and (ii) a decrease of $218,000 in
commissions and royalty expenses due to no longer having an obligation to pay a
three percent royalty on net sales to JD Holdings.
Depreciation and Amortization Expenses
Our
depreciation and amortization expenses decreased to $87,000 for the first
quarter of fiscal 2008 from $88,000 for the first quarter of fiscal 2007, a one
percent decrease. The decrease was
primarily attributable to fewer assets purchased in the first quarter of fiscal
2008 compared to fiscal 2007.
Interest Expense
Our
combined interest expense decreased to $192,000 for the first quarter of fiscal
2008 from $193,000 for the first quarter of fiscal 2007, a one percent
decrease. Our interest expense is
primarily associated with interest expense from our factoring and inventory
lines of credit and letters of credit from CIT used to help support our working
capital needs.
21
Income
Tax
For
the first quarter of fiscal 2008, our income tax expense was $62,000 compared
to $8,000 for the first quarter of fiscal 2007.
Our effective tax rate was seven percent for the first quarter of fiscal
2008. We expect our effective tax rate
to be approximately 12 percent during fiscal 2008. For the first quarter of fiscal 2007, the tax
provision consisted solely of state franchise taxes due to a net loss. For the three months ended February 29,
2008 and February 24, 2007, the difference between the effective tax rate
and the statutory rate is primarily attributable to the utilization of net operation
loss tax carryforwards against which a full valuation allowance has been
established.
Net Income
We
generated net income of $843,000 compared to a net loss of $173,000 for the
first quarter of fiscal 2007. The shift
to net income for our first quarter of fiscal 2008 compared to a net loss for
our first quarter of fiscal 2007 is largely the result of the following
factors:
·
a 10 percent growth in our net sales for Joes®
products; and
·
a 33 percent improvement in our gross profit
for Joes® products and corresponding improvement in gross margins to 45
percent from 37 percent.
Liquidity and Capital Resources
Our primary sources of liquidity are: (i) cash
from sales of our Joes® products; and (ii) cash from sales of our
accounts receivables and advances against inventory. In the first quarter of fiscal 2008, we
generated $572,000 of cash flow from operations and received $299,000 of cash
flow from financing activities. Of this
cash flow, we used $316,000 to pay the earn-out payment under the merger
agreement and $9,000 for purchases of property and equipment. During the first quarter of fiscal 2008, our
cash balance increased by $546,000 to $1,877,000 as of February 29, 2008.
We are dependent on credit arrangements with
suppliers and factoring and inventory based agreements for working capital
needs. From time to time, we have conducted equity financing through private
placement transactions and obtained increases in our cash availability from CIT
Commercial Services, Inc., a unit of CIT Group, or CIT, through guarantees
by certain related parties.
During the first quarter of fiscal 2008, our primary
method to obtain the cash necessary for operating needs was through the sales
of Joes® products and sales of our accounts receivable pursuant to our
factoring agreements and obtaining advances under our inventory security
agreements with CIT. The accounts
receivable are sold for up to 85 percent of the face amount on either a
recourse or non-recourse basis depending on the creditworthiness of the
customer. In addition, the agreements
allow us to obtain advances for up to 50 percent of the value of certain
eligible inventory. CIT currently
permits us to sell our accounts receivable at the maximum level of 85 percent
and allows advances of up to $6,000,000 for eligible inventory. CIT has the ability, in its discretion at any
time or from time to time, to adjust or revise any limits on the amount of
loans or advances made to us pursuant to these agreements. As further assurance
to CIT, cross guarantees were executed by and among us and all of our
subsidiaries to guarantee each subsidiarys obligations. As of February 29, 2008, our cash
availability with CIT was approximately $269,000. This amount fluctuates on a daily basis based
upon invoicing and collection related activity by CIT on our behalf. In
connection with the agreements with CIT, most of our tangible assets are
pledged to CIT, including all of our inventory, merchandise, and/or goods,
including raw materials through finished goods and receivables. Our trademarks
are not encumbered.
22
The agreements may be terminated by CIT upon 60 days
written notice or immediately upon the occurrence of an event of default, as
defined in the agreement. The agreements may be terminated by us upon 60 days
written notice prior to June 30, 2010 or earlier provided that the minimum
factoring fees have been paid for the respective period.
The factoring rate that we pay to CIT to factor
accounts is at 0.6 percent for accounts which CIT bears the credit risk and 0.4
percent for accounts which we bear the credit risk and the interest rate
associated with the agreements is at 0.25 percent plus the Chase prime rate.
We have also established a letter of credit facility
with CIT to allow us to open letters of credit for a fee of 0.25 percent of the
letter of credit face value with international and domestic suppliers, subject
to cash availability on our inventory line of credit.
As of February 29, 2008, we had $9,187,000 of
factored receivables with CIT and a loan balance of $3,930,000 for inventory
advances. We had 11 letters of credit in the aggregate amount of $680,000
outstanding as of February 29, 2008.
For the remainder of fiscal 2008, our primary
capital needs are for our operating expenses, including funds to support our
retail strategy, which includes opening retail stores, and working capital
necessary to fund inventory purchases, capital expenditures for our expected
retail stores and finance extensions of our trade credit to our customers. We anticipate funding our operations through
working capital generated by the following: (i) cash flow from sales of
our products; (ii) reducing our inventory levels and managing our
operating expenses; (iii) maximizing our trade payables with our domestic
and international suppliers; (iv) increasing collection efforts on
existing accounts receivables; and (v) utilizing our receivable and
inventory-based agreements with CIT.
Based on our cash on hand, cash flow from operations
and the expected cash availability under our agreements with CIT, we believe
that we have the working capital resources necessary to meet our projected
operational needs for the remainder of fiscal 2008. However, if we require more
capital for growth or experience operating losses, we believe that it will be
necessary to obtain additional working capital through credit arrangements or
debt or equity financings. We believe that any additional capital, to the
extent needed, may be obtained from additional sales of equity securities or
other loans or credit arrangements. There can be no assurance that this or
other financings will be available if needed. Our inability to fulfill any
interim working capital requirements would force us to constrict our
operations.
We believe that the rate of inflation over the past
few years has not had a significant adverse impact on our net sales or income
(losses) from operations.
Off
Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Managements Discussion of Critical Accounting Policies
We believe that the accounting policies discussed
below are important to an understanding of our financial statements because
they require management to exercise judgment and estimate the effects of
uncertain matters in the preparation and reporting of financial results. Accordingly, we caution that these policies
and the judgments and estimates they involve are subject to revision and
adjustment in the future. While they involve less judgment, management believes
that the other accounting policies discussed in Notes to Consolidated
Financial Statements - Note 2 Summary of Significant Accounting Policies
included in our Annual Report are also important to an understanding of our
financial statements. We believe that
the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our consolidated financial statements.
23
Revenue Recognition
Revenues are recorded on the accrual basis of
accounting when title transfers to the customer, which is typically at the
shipping point. We record estimated
reductions to revenue for customer programs, including co-op advertising, other
advertising programs or allowances, based upon a percentage of sales. We also allow for returns based upon
pre-approval or in the case of damaged goods. Such returns are estimated based
on historical experience and an allowance is provided at the time of sale.
Accounts Receivable and Due from Factor and Allowance for Customer
Credits and Other Allowances
We evaluate our ability to collect on accounts
receivable and charge-backs (disputes from the customer) based upon a
combination of factors. In circumstances
where we are aware of a specific customers inability to meet its financial
obligations (e.g., bankruptcy filings, substantial downgrading of credit
sources), a specific reserve for bad debts is taken against amounts due to
reduce the net recognized receivable to the amount reasonably expected to be
collected. For all other customers, we recognize reserves for bad debts and
charge-backs based on our historical collection experience. If collection experience deteriorates (i.e.,
an unexpected material adverse change in a major customers ability to meet its
financial obligations to us), the estimates of the recoverability of amounts
due to us could be reduced by a material amount.
For the first quarter of fiscal 2008, the balance in
the allowance for uncollectible accounts, customer credits and allowances was
$708,000 compared to $652,000 for the first quarter of fiscal 2007 for
non-factored accounts receivables.
Inventory
We continually evaluate the composition of our
inventories, assessing slow-turning, ongoing product as well as product from
prior seasons. Market value of
distressed inventory is valued based on historical sales trends on our
individual product lines, the impact of market trends and economic conditions,
and the value of current orders relating to the future sales of this type of
inventory. Significant changes in market
values could cause us to record additional inventory markdowns.
Valuation of Long-lived and Intangible Assets and Goodwill
We assess the impairment of identifiable
intangibles, long-lived assets and goodwill annually or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors considered important that could trigger an impairment
review other than on an annual basis include the following:
·
A significant underperformance relative to
expected historical or projected future operating results;
·
A significant change in the manner of the use
of the acquired asset or the strategy for the overall business; or
·
A significant negative industry or economic
trend.
When we determine that the carrying value of
intangibles, long-lived assets and goodwill may not be recoverable based upon
the existence of one or more of the above indicators of impairment, we will
measure any impairment based on a projected discounted cash flow method using a
discount rate determined by our management.
24
In fiscal 2007, we acquired through merger all of
the intangible assets and goodwill related to the Joes®, Joes Jeans and JD®
logo and marks. For fiscal
2007
, we did not
recognize any impairment related to the intangible assets and goodwill of our
Joes® brand since we acquired it in October 2007. We have assigned an
indefinite life to these intangible assets and therefore, no amortization
expenses are expected to be recognized.
However, we will test the assets for impairment annually in accordance
with our critical accounting policies.
Additional Merger Consideration (Earn-out)
In connection with the merger with JD Holdings, we
agreed to pay to Mr. Dahan the following additional payments in the
applicable fiscal year for 120 months following October 25, 2007:
·
No earn out if the gross profit is less than
$11,250,000 in the applicable fiscal year;
·
11.33 percent of the gross profit above
$11,251,000 to $22,500,000; plus
·
an additional three percent of the gross
profit from $22,501,000 to $31,500,000; plus
·
an additional two percent of the gross profit
from $31,501,000 to $40,500,000; plus
·
an additional one percent of the gross profit
above $40,501,000.
The additional merger consideration, or earn-out,
will be paid in advance on a monthly basis based upon estimates of gross
profits after the assumption has been reached that the payments will likely be
paid. At the end of each quarter, any
overpayments will be offset against future payments and any underpayments will
promptly be made.
EITF 95-8, Accounting for Contingent Consideration
Paid to the Shareholders of an Acquired Enterprise in a Purchase Business
Combination, addresses accounting for consideration transferred to settle a
contingency based on earnings or other performance measures. It sets forth the criteria to determine
whether contingent consideration based on earnings or other performance
measures should be accounted for as (1) adjustment of the purchase price
of the acquired enterprise or (2) compensation for services, use of property,
or profit sharing.
The determination of how to account for the
contingent consideration is a matter of judgment that depends on the relevant
facts and circumstances. Based upon our evaluation of the relevant facts and
circumstances, we have determined that accounting for the earn-out as
additional purchase price is proper. Advanced earn-out payments are recorded as
additional goodwill. As of February 29,
2008, we have recorded $441,000 as additional goodwill.
Income Taxes
As part of the process of preparing our consolidated
financial statements, management is required to estimate income taxes in each
of the jurisdictions in which we operate.
The process involves estimating actual current tax expense along with
assessing temporary differences resulting from differing treatment of items for
book and tax purposes. These timing
differences result in deferred tax assets and liabilities, which are included
in our consolidated balance sheet.
Management records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. Management
has considered future taxable income and ongoing tax planning strategies in
assessing the need for the valuation allowance.
Increases in the valuation allowance result in additional expense to be
reflected within the tax provision in the consolidated statement of
income. Reserves are also estimated for
ongoing audits regarding Federal and state issues that are currently
unresolved. We routinely monitor the potential impact of these situations. Based on managements assessment, there has
been no reduction of the valuation allowance other than to the extent current
year net income was offset by net operating losses that carried forward.
25
Contingencies
We
account for contingencies, other than income tax contingencies, in accordance
with Statement of Financial Accounting Standards, or SFAS No. 5, Accounting
for Contingencies. SFAS No. 5
requires that we record an estimated loss from a loss contingency when
information available prior to issuance of our financial statements indicates
that it is probable that an asset has been impaired or a liability has been
incurred at the date of the financial statements and the amount of the loss can
be reasonably estimated. Accounting for
contingencies such as legal and income tax matters requires management to use
judgment. Many of these legal and tax contingencies
can take years to be resolved.
Generally, as the time period increases over which the uncertainties are
resolved, the likelihood of changes to the estimate of the ultimate outcome
increases. Management believes that the accruals for these matters are
adequate. Should events or circumstances
change, we could have to record additional accruals.
Stock Based Compensation
We
adopted the provisions of and account for stock-based compensation in
accordance with Statement of Financial Accounting Standards, or SFAS, 123(R), Share
Based Payment on November 27, 2005.
We elected the modified prospective method where prior periods are not
revised for comparative purposes. Under
the fair value recognition provisions of SFAS 123(R), stock based compensation
is measured at grant date based upon the fair value of the award and expense is
recognized on a straight-line basis over the vesting period. We use the Black-Scholes option pricing model
to determine the fair value of stock options, which requires management to use
estimates and assumptions, which are applied consistent with the prior
year. If factors change or we employ
different assumptions for estimating fair value of the stock option, our
estimates may be different than future estimates or actual values realized upon
the exercise, expiration, early termination or forfeiture of those awards in
the future. At this time, we believe
that our current method for accounting for stock based compensation is
reasonable. Furthermore, under SFAS
123(R), an entity may elect either an accelerated recognition method or a
straight-line recognition method for awards subject to graded vesting based on
a service condition, regardless of how the fair value of the award is
measured. For all stock based
compensation awards that contain graded vesting based on service conditions, we
have elected to apply a straight-line recognition method to account for these
awards. See Notes to Condensed
Consolidated Financial Statements Note 9 Stockholders Equity Stock
Incentive Plans for additional discussion of SFAS 123(R).
Recent Accounting Pronouncements
On
July 13, 2006, the FASB issued Interpretation No. 48, or FIN No. 48,
Accounting for Uncertainty in Income Taxes: An interpretation of FASB
Statement No. 109. This
interpretation clarifies the accounting for uncertainty in income taxes recognized
in an entitys financial statements in accordance with SFAS No. 109, Accounting
for Income Taxes. FIN No. 48
prescribes a recognition threshold and measurement principles for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. This interpretation is effective
for fiscal years beginning after December 15, 2006. We adopted FIN 48 effective December 1,
2007. The adoption of FIN 48 did not
have a material impact on our results of operations, consolidated financial
position or cash flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, or SFAS No. 157, which defines fair value, establishes a
framework for measuring fair value and requires enhanced disclosures about fair
value measurements. SFAS No. 157
requires companies to disclose the fair value
26
of
their financial instruments according to a fair value hierarchy (i.e., levels
1, 2, and 3, as defined). Additionally, companies are required to provide
enhanced disclosure regarding instruments in the level 3 category, including a
reconciliation of the beginning and ending balances separately for each major
category of assets and liabilities. SFAS
No. 157 is effective for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. We adopted SFAS No. 157 on December 1,
2007. Given the nature of our current
financial instruments, the adoption of SFAS No. 157 did not have a
material impact on our results of operations or consolidated financial
position.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement No. 115, or SFAS No. 159.
SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. Unrealized gains and losses on items for
which the fair value option has been elected will be recognized in earnings at
each subsequent reporting date. SFAS No. 159
is effective for financial statements issued for fiscal years beginning after November 15,
2007. We adopted SFAS No. 159 on December 1,
2007. Given the nature of our current
financial instruments, the adoption of SFAS No. 159 did not have a
material impact on our results of operations or consolidated financial
position.
On December 4, 2007, the FASB issued SFAS No. 141
(Revised 2007), Business Combinations, or SFAS No. 141(R). SFAS No. 141(R) will significantly
change the accounting for business combinations. Under SFAS No. 141(R), an
acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS No. 141(R) also includes a substantial
number of new disclosure requirements.
SFAS No. 141(R) applies prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008, which is the
year beginning December 1, 2009 for us.
We are currently evaluating the impact that SFAS No. 141(R) will
have on our financial statements.
On December 4, 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial Statements-an Amendment of
Accounting Research Bulletin (ARB) No. 51, or SFAS No. 160. SFAS No. 160 establishes new accounting
and reporting standards for a non-controlling interest in a subsidiary and for
the deconsolidation of a subsidiary.
Specifically, this statement requires the recognition of a
non-controlling interest (minority interest) as equity in the consolidated
financial statements separate from the parents equity. The amount of net income attributable to the
non-controlling interest will be included in consolidated net income on the
face of the income statement. SFAS No. 160 clarifies that changes in a
parents ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this
statement requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. Such gain
or loss will be measured using the fair value of the non-controlling equity
investment on the deconsolidation date.
SFAS No. 160 also includes expanded disclosure requirements
regarding the interests of the parent and its non-controlling interest. SFAS No. 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after December 15,
2008, which is the year beginning December 1, 2009 for us. We are currently evaluating the impact that
SFAS No. 160 will have on our financial statements.
Item 3. Quantitative
and Qualitative Disclosure About Market Risk.
We are exposed to certain market risks arising from
transactions in the normal course of our business. Such risk is principally associated with
interest rate and changes in our credit standing.
27
Interest Rate Risk
Our obligations under our receivable and inventory
agreements bear interest at floating rates (primarily JP Morgan Chase prime
rate); therefore, we are sensitive to changes in prevailing interest
rates. We believe that a one percent
increase or decrease in market interest rates that affect our financial
instruments would have an immaterial impact on earnings or cash flow during the
next fiscal year.
Foreign Currency Exchange Rates
Foreign currency exposures arise from transactions,
including firm commitments and anticipated contracts, denominated in a currency
other than an entitys functional currency and from foreign-denominated
revenues translated into U.S. dollars.
We generally sell our products in U.S. dollars. However, we sell an immaterial amount of our
products in Euros. Changes in currency
exchange rates may affect the relative prices at which we and our foreign
competitors sell products in the same market and collect receivables from such
sales. We currently do not hedge our
exposure to changes in foreign currency exchange rates. We cannot assure you that foreign currency
fluctuations will not have a material adverse impact on our financial condition
and results of operations.
We also source most of our products outside of the U.S. However, we generally purchase our products
in U.S. dollars. The cost of these
products may be affected by changes in the value of the relevant currencies;
however, our exposure to currency exchange rates is limited as a result of such
companies outside of the U.S. accepting payment in U.S. dollars.
Item 4. Controls
and Procedures.
Evaluation
of Disclosure Controls and Procedures
As
of February 29, 2008, the end of the period covered by this periodic
report, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Securities Exchange Act Rule 15d-15.
Disclosure controls and procedures are controls and
procedures that are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Securities Exchange Act
of 1934, or 1934 Act, is recorded, processed, summarized and reported within
the time periods specified in the SEC rules and forms. Management recognizes that a control system,
no matter how well conceived and operated, can provide only reasonable
assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute
assurance that all control issues within the company have been detected. Therefore, assessing the costs and benefits
of such controls and procedures necessarily involves the exercise of judgment
by management. Our disclosure controls
and procedures are designed to provide reasonable assurance of achieving the
objective of ensuring that information required to be disclosed in our reports
filed or submitted under the 1934 Act is recorded, processed, summarized and
reported within the time periods specified in the SEC rules and
forms. In addition, our disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that the information required to be disclosed by us in the
reports we file or submit under the 1934 Act is accumulated and communicated to
management, including our principal executive and principal financial officers
or persons performing similar functions, as appropriate, to allow timely
decisions regarding required disclosure.
28
Our Chief Executive Officer and Chief Financial
Officer have concluded, based on our evaluation of our disclosure controls and
procedures, that our disclosure controls and procedures under Rule 13a-15(e) and
Rule 15d-15(e) of the 1934 Act are effective at the reasonable
assurance level.
Changes
in Internal Control Over Financial Reporting
We made no changes in our internal control over
financial reporting during the first quarter of the fiscal year covered by this
report that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 4T. Controls
and Procedures.
Not Applicable.
29
PART II OTHER INFORMATION
Item 1. Legal
Proceedings.
We are a party to lawsuits and other contingencies in
the ordinary course of our business. We
do not believe that it is probable that the outcome of any individual action
would have an adverse effect in the aggregate on our financial condition. We do not believe that it is likely that an
adverse outcome of individually insignificant actions in the aggregate would be
sufficient enough, in number or in magnitude, to have a material adverse effect
in the aggregate on our financial condition.
Item 1A. Risk Factors.
There
have been no material changes from the risk factors previously disclosed in our
Annual Report on Form 10-K for the fiscal year ended November 30,
2007.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults
upon Senior Securities.
None.
Item 4. Submission
of Matters to a Vote of Security Holders.
None.
Item 5. Other
Information.
(a) None.
(b) There have been no material changes to
the procedures by which security holders may recommend nominees to our board of
directors, including adoption of procedures by which our stockholders may
recommend nominees to the our board of directors.
30
Item 6. Exhibits.
Exhibits
(listed according to the number assigned in the table in Item 601 of Regulation
S-K):
Exhibit No.
|
|
Description
|
|
Document if Incorporated
by Reference
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
|
|
Filed
herewith
|
|
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
|
|
Filed
herewith
|
|
|
|
|
|
32
|
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
Filed
herewith
|
31
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
JOES JEANS INC.
|
|
|
|
April 14,
2008
|
/s/
Marc B. Crossman
|
|
Marc
B. Crossman
|
|
|
Chief Executive Officer (Principal Executive
Officer),
President and Director
|
|
|
|
|
|
|
|
/s/
Hamish Sandhu
|
|
Hamish
Sandhu
|
|
|
Chief
Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
|
32
EXHIBIT INDEX
Exhibit No.
|
|
Description
|
|
Document if Incorporated
by Reference
|
31.1
|
|
Certification of the Chief
Executive Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.
|
|
Filed herewith
|
|
|
|
|
|
31.2
|
|
Certification of the Chief
Financial Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.
|
|
Filed herewith
|
|
|
|
|
|
32
|
|
Certification of the Chief
Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
Filed herewith
|
33
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